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Price Discrimination

This post is not an original thought (do we truly even have “original thoughts”, or are they all built upon the thoughts of others? I leave that for others to blog about). I recently read a decade old paper on price discrimination and privacy from Andrew Odlyzko. It was a great read and it got more thinking about many of the motivations for privacy invasions, particularly this one.

Let me start out with a basic primer on price discrimination. The term refers to pricing items based on the valuation of the purchaser, in other words discrimination in the pricing of goods and services between individuals. Sounds a little sinister, doesn’t it? Perhaps downright wrong, unethical. Charging one price for one person and a different price for another. But price discrimination can be a fundamental necessity in many economic situations.

Here’s an example. Let’s say I am bringing cookies to a bake sale. For simplicity, let’s say there are three consumers at this sale (A, B and C). Consumer A just ate lunch so isn’t very interest in a cookie but is willing to buy one for $0.75. Consumer B likes my cookies and is willing to pay $1.00. Consumer C hasn’t eaten and loves my cookies but only has $1.50 on him at the time. Now, excluding my time, the ingredients for the cookies cost $3.00. At almost every price point, I end up losing money

Sale price $0.75 -> total is 3x$0.75 = $2.25
Sale price $1.00 -> total is 2x$1.00 = $2.00 (Consumer A is priced out as the cost is more than they are willing to pay)
Sale price $1.50 -> total is 1x$1.50 = $1.50 (Here both A and B are priced out)

However, if I was able to charge each Consumer their respective valuation of my cookies, things change.

$0.75+$1.00+$1.50= $3.25

Now, not only does everyone get a cookie for what they were willing to pay, I cover my cost and earn some money to cover my labor in baking the cookie. Everybody is happier as a result, something that could not have occurred had I not been able to price discriminate.

What does this have to do with Privacy? The more I know about my consumers, the more I’m able to discover their price point and price sensitivity. If I know that A just ate, or that C only has $1.50 in his pocket, or that B likes my cookies, I can hone in on what to charge them.

Price discrimination it turns out is everywhere and so are mechanisms to discover personal valuation. Think of discounts to movies for students, seniors and military personnel. While some movie chain may mistakenly believe they are doing it out of being a good member of society, there real reason is they are price discriminating. All of those groups tend to have less disposable income and thus are more sensitive to where they spend that money. Movies theaters rarely fill up and an extra sale is a marginal income boost to the theater. This is typically where you find price discrimination, where the fix costs are high (running the theater) but the marginal cost per unit sold are low. Where there is limited supply and higher demand, the seller will sell to those willing to pay the highest price.

But what do the movie patrons have to do to obtain these cheaper tickets? They have to reveal something about themselves….their age, their education status or their profession in the military.

Other forms of uncovering consumer value also have privacy implications. Most of them are very crude groupings of consumer in to bucket, just because our tools are crude, but some can be very invasive. Take the FAFSA, the Free Application for Federal Student Aid. This form is not only needed for U.S. Federal loans and grants, but many universities rely on this form to determine scholarships and discounts. This extremely probing look into someones finances is used to perform price discrimination on students (and their parents), allowing those with lower income and thus higher price sensitivity to pay less for the same education as another student from a wealthier family.

Not all methods of price discrimination affect privacy, for instance, bundling. Many consumers bemoan bundling done by cable companies who don’t offer an ala carte selection of channels. The reason for this is price discrimination. If they offered each channel at $1 per month, they would forgo revenue from those willing to pay $50 a month for the golf channel or those willing to pay $50 a month for the Game Show Network. By bundling a large selection of channel, many of whom most consumers don’t want, they are able to maximize revenue from those with high price points for certain channels as well as those with low price points for many channels.

I don’t have any magic solution (at this point). However, I hope by exposing this issue more broadly we can begin to look for patterns of performing price discrimination without privacy invasions. One of the things that has had me thinking about this subject is a new App I’ve been working on for privacy preserving tickets and tokens for my start-up Microdesic. Ticket sellers have a problem price discriminating and tickets often end up on the secondary market as a result.

[I’ll take the bottom of this post to remind readers of two upcoming Privacy by Design workshops I’ll be conducting. The first is in April in Washington, D.C. immediately preceding the IAPP Global Summit. The second is in May in Seattle. Note, the tickets ARE price discriminated, so if you’re a price sensitive consumer, be sure to get the early bird tickets. ]